(IDEA) Cardinal Energy
So far, the E&Ps we’ve profiled to date for capital appreciation and income have been confined to oilsands operators. These include Cenovus Energy (Cenovus Energy Inc. (CVE) Stock Price Today, Quote & News), Suncor Energy (Suncor Energy Inc. (SU) Stock Price Today, Quote & News), MEG Energy (OTCPK:MEGEF), and Canadian Natural Resources (Canadian Natural Resources Limited (CNQ) Stock Price Today, Quote & News). We prefer oilsands operators over shale or conventional operators due to their low operating risks, leverage to higher oil prices, long reserve lives, and their stocks’ significant discounts to intrinsic value.
Cardinal Energy (OTCPK:CRLFF) (CJ.TO) is our first E&P recommendation outside the oil sands. Cardinal’s stock may be a desirable holding in its own right but also as a way to diversify an energy equity portfolio by operating model.
Cardinal produces primarily medium and light grades of crude oil from conventional reservoirs in Alberta and Saskatchewan, Canada. The company’s asset base is diversified by region with each region contributing to total production in a balanced manner, as shown in the graphic below.
Source: Cardinal Energy Website.
Cardinal aims to acquire mature, low-decline crude oil properties that generate significant free cash flow to fund growth and pay a dividend. Despite paying out most of its cash flow as a dividend, the company has an impressive track record of prudently growing production. Its liquids production by year is shown below.
In the first half of 2023, wildfires reduced Cardinal's production by 700 boe/d. Production is currently running at approximately 22,000 barrels per day (bpd), roughly the production rate achieved in 2018. Production has been stable over recent quarters, as shown in the following chart.
Source: Cardinal Energy May 2023 Investor Presentation.
Management plans to sustain production of 22,000 boe/d in the second half of the year.
Due to Cardinal’s peer-leading 10% decline rate, its 88% liquids cut, and the lack of capex being allocated to significant production growth, its capex requirements are relatively light for a conventional oil producer. The following table details the $115 million of capex Cardinal plans to spend in 2023.
Source: Cardinal Energy May 2023 Investor Presentation.
At the rate of 21,750 bpd, the company has 11.0 years of reserves of oil and NGLs, with the latter accounting for only 3.7% of total liquids reserves. Cardinal’s reserve report estimates its net present value to be $18.54 per share, more than double the current stock price.
Management is actively engaged in replacing reserves through acquisitions and developing existing acreage. Since 2019, its net proved plus probable reserves have grown by 4.9%. Over that period, Cardinal spent $23.8 million acquiring new assets while also generating $21.4 million of proceeds from asset sales.
At the moment, the best example of Cardinal’s efforts to find and develop new reserves is its Clearwater position in northern Alberta. The Clearwater recently emerged as one of the hottest plays in Canada, and Cardinal has 12,000 acres in the play. It’s in the process of delineating the acreage. Highly economic production is likely to boost Cardinal’s production rate, cash flow, and stock price.
Cardinal’s Attractive Economics
Since 2022, Cardinal has paid a $0.06 monthly dividend. The company has varied its dividend in response to changes in the oil price environment, as shown in its long-term dividend record.
Cardinal offers its shareholders production stability and low financial risk to equity. It also offers leverage to higher oil prices, as shown in the following table.
We estimate Cardinal’s dividend is covered by free cash flow down to US$68 per barrel WTI.